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The Rise of a Bipartisan Tax Break for the Working Poor

The earned income tax credit is a rare antipoverty program that has enjoyed a long history of bipartisan support among state and federal policymakers.

Minimum Wage California
(AP/Marcio Jose Sanchez)
Next month signals the start of the tax season. As residents of New Jersey begin filing their taxes, more than half a million of them can expect to get more money back.

That's because New Jersey was one of three states this year, along with Oregon and Rhode Island, to expand its tax credit program for low-wage workers. The expansions are part of a national bipartisan trend since the Great Recession of states either creating or increasing matching programs tied to the federal earned income tax credit (EITC). 

"As state budgets have slowly come back, [states are] in a better position to adopt a new credit or expand on what they already have in place," said Michael Leachman, director of state fiscal policy research at the Center on Budget and Policy Priorities.

Even during the recession -- when states were hurting for revenue -- only a few eliminated or cut back on their EITC matches.

State matches act as a small boost to the federal EITC, which lets low-income workers apply a credit against the taxes they owe. If the credit is worth more than their taxes, workers get to collect the difference. In 2015, about 28 million Americans benefited from nearly $66 billion in refunds from the federal EITC program. Most of the recipients are parents with dependent children.

Twenty-six states and the District of Columbia offer an additional credit, ranging from a 3.5 percent match in Louisiana to a 40 percent match in Washington, D.C.

The EITC is a rare antipoverty program that has enjoyed a long history of bipartisan support. The national poverty rate has been stuck at about 15 percent for the past four years and is higher than at any point in two decades. Economic research suggests that the EITC encourages single mothers to work and to increase their incomes over time. Seven consecutive presidents, including President Obama, have expanded the federal credit in some way. 

Since 2013, seven states have passed laws to increase their percentage match of the federal credit:

  • Ohio, from 5 percent to 10 percent
  • Oregon, from 6 percent to 8 percent
  • Iowa, from 14 percent to 15 percent
  • Maryland, from 25 percent to 26 percent
  • Massachusetts, from 15 percent to 23 percent
  • New Jersey, from 20 percent to 35 percent
  • Rhode Island, from 10 percent to 15 percent
In addition to those increases, California established a state match, and Oregon raised its match to 11 percent for families with children under 3. Maryland has scheduled several years of increases so that the match will reach 28 percent by 2018. And two states -- Maine and Rhode Island -- made their credits refundable, allowing some workers to get money back when the credit is worth more than the taxes they owe. 

This year, states considered more than 170 EITC-related bills, according to the National Conference of State Legislatures. Only 13 of those were enacted, and none were as sweeping as what passed in New Jersey. 

After Gov. Chris Christie reduced New Jersey's EITC match in 2010 to help plug a $2.2 billion shortfall, lawmakers this year upped the state match from 30 percent to 35 percent. With the expansion, eligible taxpayers in New Jersey will receive, on average, an $836 credit from the state. Currently, a married couple with two children making about $49,000 a year can receive up to $7,200 in earned income tax credits (state and federal combined).

The increase in New Jersey's percentage match is expected to cost the state roughly $62 million a year in lost tax revenue, an amount that will likely rise with inflation.

The credit, however, can only help those who know about it. Each year, about 20 percent of eligible tax filers don't claim the federal credit. That's why several states -- such as Arizona, Iowa and Virginia -- passed laws to raise awareness about the EITC this year. 

State Earned Income Tax Credit Programs

Twenty-nine states and the District of Columbia offer a percentage match to federal earned income tax credit program. The table below lists those states, the size of their percentage match and whether the state credits are refundable.

State Percentage of Federal Credit Refundable Tax Credit?
California 85% of the federal credit up to half of the federal phase-in range Yes
Colorado 10% Yes
Connecticut 30% Yes
Delaware 20% No
District of Columbia 40% Yes
Illinois 18% Yes
Indiana 9% Yes
Iowa 15% Yes
Kansas 17% Yes
Louisiana 3.5% Yes
Maine 5% Yes
Maryland 26%; will increase to 27% in 2017 Yes
Massachusetts 23% Yes
Michigan 6% Yes
Minnesota 25-45% of federal credit based on income Yes
Nebraska 10% Yes
New Jersey 35% Yes
New Mexico 10% Yes
New York 30% Yes
Ohio 10%; Limited to 50% of taxes due if taxable income exceeds $20,000 No
Oklahoma 5% No
Oregon 8%; 11% for families with children under age 3 Yes
Rhode Island 15% Yes
Vermont 32% Yes
Virginia 20% No
Hawaii 20% No
Montana 3% Yes
South Carolina 125% No
Wisconsin 4% (1 child); 11% (2 children); 34% (3 children) Yes

NOTE: Washington state enacted a matching EITC in 2008, but the credit is inactive as it has not yet been funded.
SOURCE: Internal Revenue Service, individual state agencies
LAST UPDATED: Sept. 18, 2017

J.B. Wogan is a Governing staff writer.
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